Pros and Cons of Investing in PG Electroplast

Did you know that according to India's Ministry of Electronics and Information Technology India's electronic manufacturing sector will more than double its output from US$ 115 billion (bn) to US$ 250 bn in just five years?

Yes, this is the official estimate of the Indian government. The value of electronics exports too are expected to double. If these estimates are met, employment is the sector will double from 2.5 m to around 5 m.

There is no doubt that the Indian electronics manufacturing industry is booming. The boom is clearly visible in the export numbers.

India's electronics exports increased 23.6% to US$ 29.11 bn in FY24, compared to US$ 23.57 bn in FY23. The top five export markets for electronics goods were the US, UAE, Netherlands, UK, and Italy.

Even more impressive is the fact that India's electronics imports fell 7% in FY24. This is the first time this has happened. It's a sign of an industry that is coming of age. Indian electronics firms have begun sourcing critical inputs from withing the country to prepare the final product.

Sunil Vachani, chairman of Dixon Technologies, said this recently...

• "Value addition in India has become high in home appliances like refrigerators, ACs and washing machines, where all critical components like compressors, motors, sheet metal, heat exchangers are now locally manufactured".

The government's Make in India initiative is slowly starting to have an impact on the industry. The production-linked incentive (PLI) scheme for large-scale electronics manufacturing has also played its part in the growth of the industry.

This particular PLI scheme received a major boost in the interim budget in February 2024 with a nearly increase in outlay to Rs 62 bn for FY25. Thus, even more capacity will be created over the next few years. This will result in more production and exports.

The chances are good that the best electronics manufacturing stocks in India will be among the biggest multibaggers in the stock market over the next few years.

In this editorial, we will consider the stock of PG Electroplast, and discuss its pros and cons.

Pros

#1 Strong Position in the Industry

PG Electroplast Ltd (PGEL), the flagship company of the PG Group, established in 2003, is a prominent player in India's electronic manufacturing services (EMS) industry.

Specialising in original design manufacturing (ODM), original equipment manufacturing (OEM), and plastic injection molding, PGEL provides services to over 60 renowned Indian and international brands.

The company manufactures a wide range of products like washing machines, ACs, coolers, and electronics. It also makes moulds for automotive applications, white goods, and home and kitchen appliances. It's the second largest ODM for ACs and washing machines in the country.

It has a customer base of 50+ leading Indian and global brands. Major clients include Godrej, Blue Star, Bajaj Electricals, Croma, Acer, Voltas, Whirlpool, Daikin, Foxconn, Hyundai, Jaquar, Honeywell, LG Electronics, Carrier, Jaguar, Kohler, Usha, Whirlpool, SMR, Bright Auto, Groupo-Antolin, etc.

PGEL operates as a comprehensive service provider, offering expertise in plastic molding, tool manufacturing, PCB assembly, motor production, final product assembly, and mobile manufacturing.

The company has 8 manufacturing units in Greater Noida, Roorkee, and Ahmednagar. It's also setting up a new manufacturing plant in Rajasthan. PGEL is also focussed on R&D, expanding its product line, and capacity enhancement of existing products. It's planned capital expenditure is Rs 38 bn.

#2 Good Financials

PGEL earns the majority of its revenue from manufacturing air conditioners, washing machines, and coolers. It saw a revenue growth of 33.8% CAGR From FY20 to FY24.

In the same period, the company saw a whopping 43.9% and 120.3% CAGR growth in operating profit and net profit. This was due to strong growth in revenue and good cost control.

The operating and net margins of the company expanded by 3-4% during the same period and averaged 8.7% and 4% respectively.

In FY24, the company's sales and net profits grew 27.2% and 76.9% respectively. It cash flow from operations more than quadrupled to Rs 1.86 bn.

PGEL has funded its growth in the past with debt. However, its debt levels are under control. The debt to equity at the end of FY24 was 0.4. The interest coverage ratio also improved and stood at 4.4 in FY24, from 3.0 in FY23

In terms of return ratios, they are neither great nor poor. The company's return on equity (RoE) and return on capital employed (RoCE) averaged 11.7% and 15.8%, respectively from FY20 to FY24.

Also, PGEL doesn't pay any dividends as the company is still in its growth phase.

With the government supporting electronics manufacturing through the PLI scheme, the company stands to benefit by catering to the growing demand for electronics in India.

#3 Future Looks Good

The company's order book remains robust, and the management is looking to accelerate growth in FY25. The management foresees large opportunities in plastic molding and consumer durables like washing machines, room ACs, refrigerators, etc., along with opportunities in the ODM space.

Improving operational efficiencies will lead to better profitability, higher cash flows, and thus, reinvestment. This will in turn improve the company's capabilities, enabling it to reap future benefits.

The management has provided strong guidance for FY25 with a 24% YoY revenue growth to Rs 34 bn. This will be driven by a 44% increase in its product business (RAC, WM, coolers) due to low channel inventory and a robust order book.

While recognising the rising competitive intensity, PGEL remains confident in sustaining demand through its cost-efficient structure and alignment with the latest industry trends.

Looking forward, the management expects revenue growth of 20-25% over the next few years and is open to scaling the business with debt if opportunities arise that don't hurt the return ratios.

Additionally, the joint venture (JV) with Jaina Group aims for Rs 6,000 million (m) in revenue by selling over 700,000 TV units in FY25, doubling from 350,000 units in FY24.

The company is eagerly looking forward to taking advantage of the expansion of various PLI schemes targeting electronics manufacturing in India.

Cons

#1 Extremely Competitive Industry

PGEL has done well in India's electronics manufacturing industry. However, the industry is extremely difficult to succeed in. The complexity of manufacturing high-end consumer electronics is well-known. What's more, in a globalised world, the company's competition is also global in nature.

The company is doing well right now but it's behind its Indian competitors in terms of scale. As the company scales up and starts producing more high-end products, it will also begin competing with the best electronics manufacturers in the world.

The company's return ratios are not high because it's still in expansion mode. When faced with ever increasing competition, will it be able to improve its return ratios? Only time will tell.

#2 Very High Valuations

No matter how good the fundamentals of the business may be, investors who may be interested in considering the stock should pay close attention to its valuation ratios.

The stock's price to earnings (PE) ratio and price to book (PB) ratio are 90 and 14, respectively. These numbers point to the fact that the stock's valuations are very high.

Happy investing.

Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such. Learn more about our recommendation services here...